Edited version of your written advice

Authorisation Number: 1013040522408

Date of advice: 21 July 2016

Ruling

Subject: The amount of GST payable on the sale of a business

Question 1

What is the amount of GST payable on the sale of a particular business?

Answer

GST payable is 1/11th of the consideration which is a particular amount.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for GST.

The vendor is registered for GST.

You purchased the business and business assets of the particular business (business) from the vendor under a Business Sale Agreement (agreement).

An invoice (invoice) was issued by the vendor which stated that GST was not payable in relation to:

• Tenant bonds

• Prepaid revenue

The invoice stated that total GST payable on the sale was 1/11^th of a lesser particular amount.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

• Section 9-5

• Section 9-70

• Section 9-75

• Section 38-325

ATO view documents

Goods and Services Tax Ruling GSTR 2004/9 Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise

Reasons for decision

Summary

The agreement stated that the purchase price was a particular amount (inclusive of GST) but subject to adjustments. Two adjustments did reduce the amount payable under the agreement to a lesser particular amount

The two adjustments related to the purchaser assuming the vendor's liabilities in relation to tenant bonds and prepaid revenue. As these two liabilities are not statutory obligations they form part of the consideration for the supply for GST purposes.

Detailed reasoning

The invoice included a particular amount of GST payable and the agreement made no reference to 'going concern' so the sale was not treated as the GST-free supply of a going concern under Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The sale of the business was a taxable supply under Section 9-5 of the GST Act.

Generally, the amount of GST payable is 1/11^th of the price (or consideration) under Sections 9-70 and 9-75 of the GST Act.

The key terms of the agreement stated that the purchase price was a particular amount (inclusive of GST)' but subclause 8(a) of the agreement stated that at settlement you must pay the purchase price (less the Deposit and subject to the Adjustments) to the vendor in clear funds.'

Clause 10 of the agreement deals with adjustments. In states, in part: 'The Adjustments are an increase to, or a reduction of, the Purchase Price (as appropriate).'

Clause 10 also stated that there will be 'a reduction to the Purchase Price for any monies paid in advance to [the vendor] but not yet earned by the Seller and only to the extent it is unearned including advance payments, lay-by instalments, deposits, subscription fees or gift vouchers'.

The invoice indicated that the purchase price was reduced by two adjustments, as allowed for under the agreement, and that GST was payable as 1/11th of a lesser particular amount.

Goods and Services Tax Ruling GSTR 2004/9 Goods and services tax: GST consequences of the assumption of vendor liabilities by the purchaser of an enterprise states at paragraphs 23 to 26 and 56 as follows:

23. A purchaser of an enterprise does not make a supply within the meaning of section 9-10, or specifically within the meaning of paragraph 9-10(2)(g), of an entry into an obligation, if the liability upon the purchaser is imposed, required and effected by the words of a statute.

24. This is also the case where the statutory liability is merely confirmed by way of contractual agreement between the parties.

25. The consideration for the supply of the enterprise by the vendor does not include the value of a liability which will be imposed upon the purchaser by statute after settlement. Any set-off allowed at settlement, or any payment from the vendor to the purchaser in respect of a statutory liability imposed on the purchaser, is a reduction to the price of the enterprise.

26. A purchaser assumes a liability of the vendor for the purposes of this Ruling if, as part of the terms of the supply of the enterprise, the purchaser promises to the vendor that it will discharge, either immediately or in the future, the vendor's liability to a third party.

56. If a purchaser acquires an enterprise and assumes an existing quantified liability of the vendor, it agrees to pay the purchase price to the vendor and to pay an amount directly to a creditor. In these circumstances:

(a)   the payment of the amount of the purchase price to the vendor is monetary consideration for the supply of the enterprise; and

(b)   the payment to the creditor is also part of the consideration for the supply of the enterprise.

The agreement made no mention of 'going concern' and it is clear that the sale of the business was not intended to be the GST-free supply of a going concern under section 38-325 of the GST Act. There is no statutory obligation for the purchaser to assume the liability for the prepaid revenue.

The total consideration for the supply of the business for GST purposes includes the liabilities assumed by the purchaser for tenant bonds and prepaid revenue as these are not statutory obligations. Total consideration is a particular amount.

GST payable is 1/11th of a particular amount.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).